Ford's visionary move echoes still

A famed pay hike has been widely misunderstood

Updated 3:38 pm, Monday, January 13, 2014

Henry Ford, right, stands with his first car built in 1892, assembled in the brick barn in the background in Detroit. At left is James Bishop.

Henry Ford, right, stands with his first car built in 1892, assembled in the brick barn in the background in Detroit. At left is James Bishop.

Photo: Uncredited

Ford's visionary move echoes still

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It's been 100 years since automaker Henry Ford announced one of the most famous business decisions of all time, cited to this day as an example of the economic benefits of boosting workers' wages.

In short, Ford decided to more than double the pay for his assembly-line workers.

The impact of his strategy generally is characterized in terms of benevolent leadership and shrewd salesmanship. Ford employees were suddenly able to afford the vehicles they produced, which expanded the market.

Given the current debate over paying workers a living wage, it's virtually certain we'll be hearing more about the bold initiative Ford unveiled Jan. 5, 1914.

But like any story told and retold over decades, details get muddied. And so Ford's move to raise wages has taken on a mythological quality that threatens to obscure its underlying principle, which was a pragmatic calculation.

The nation was struggling to dig out of a recession a century ago when Ford declared he was setting aside some of his company's profits to increase wages from $2.34 a day to $5. He also cut the workday from nine hours to eight and hired a third shift to churn out Model T's around the clock.

Rivals called Ford a fool, a damned socialist and worse. Others cast him as a man of the people. Thousands of job seekers lined up outside his Michigan plants — so many, in fact, that the company turned hoses on them at one point to get them to disperse.

It set the stage for the Model T to become an automobile the middle class could afford, which in turn became a catalyst for profound changes in American life as we became a nation of drivers.

Originally, though, Ford's concern was about managing his business; he said he developed his plan through discussions with Thomas Edison about boosting efficiencies.

The idea that sold the public was simpler; he would pay workers enough to turn them into customers, a line of reasoning that became known as Fordism. This idea also tends to get overblown, because it seems unlikely Ford workers in 1914 could suddenly afford to make this purchase.

President Barack Obama has cited Ford's pay policy on various occasions to bolster a variety of stances, including the value of improving the economy from the bottom up. The president even used it in a 2009 speech to drive home a point about the importance of allowing unions to organize, amusing if only because Ford himself was so virulently anti-union.

"The business press says, 'Oh, that (allowing unions to organize is) anti-business,' and whenever I hear that I'm always reminded of what Henry Ford said," Obama said.

"Somebody asked him, they said, 'Why are you paying your workers so well?' He said, 'Well, if I don't pay them well, they won't be able to buy a car.'"

In his day, Ford preached that underpaid workers were no more likely to be consumers of most goods and services than the unemployed, so it was in the interests of nearly all businesses to pay "the highest wage the employer can steadily" afford.

An employer "has to create customers, and if he is making a commodity, then his own workers are among his best customers," Ford noted in "The Great Today and Greater Future," a 1926 collaboration with journalist Samuel Crowther.

"If an employer does not share prosperity with those who make him prosperous, then pretty soon there will be no prosperity to share," they wrote.

But don't get the wrong idea.

If confronted by demands for a living wage or any kind of minimum wage, Ford's hose might well have come out again.

"There can be no 'standard wage,'" Ford wrote with Crowther. "Any attempt to fix a 'living wage' is an insult to the intelligence of both managers and workers."

The rhetoric that made Ford a populist hero — and still burnishes a legacy that might otherwise be eclipsed by less admirable traits, actions and beliefs — masked the carmaker's true top priority in awarding across-the-board raises.

Employee turnover had hurt Ford's efforts to maximize efficiency. More than doubling pay enabled Ford to recruit and retain the best workers, ensuring greater speed and quality. Had others matched his pay scale, that advantage would have vanished.

Paying 20,000 to 30,000 workers enough to buy cars wasn't going to make or break his business. Boosting Model T production to a day and cutting the cost from around $850 to $300 would. That's what the wage increase helped him do.

"By 1920, Ford was producing more cars and at a much lower price, and he was able to pass along some of those cost savings to car buyers. The ironic thing is that, eventually, because prices came down as a result of this management insight he had, that was what enabled the workers to buy the cars," said William Holahan, a professor emeritus in economics at the University of Wisconsin-Milwaukee.